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Diageo Warns of $350M Hit From EU’s Probe on U.K. Tax Scheme

Diageo Plc, the maker of Johnnie Walker whisky, has warned the European Union’s state
aid probe into a U.K. government tax scheme may cost it as much as 250 million pounds
($356.4 million).

The London-based company said Jan. 25 in its
half-year results it “may be affected by the outcome” of the state aid investigation. While Diageo
will face the financial hit if the EU upholds its preliminary findings, the business
isn’t making a provision in its accounts for the moment, it added.

In October 2017, the EU’s executive arm said it had opened an “in-depth” state aid
probe over whether the U.K. gave multinational companies an unfair advantage over
their local competitors through exempting the larger businesses from specific measures
to target tax avoidance.

Diageo’s disclosure marks the first time a company has estimated the probe’s financial
impact.

“Contrasting to other ongoing state aid cases, the European Commission has looked
through a whole set of legislation here, rather than focusing on just one company,”
Nick Udal, a London-based international tax partner at global accounting firm BDO,
told Bloomberg Tax by telephone Jan. 25.

Similar Structures Affected

Like
Ireland’s battle over whether Apple Inc. owes it 13 billion euros ($16.1 billion) in unpaid tax, the
EU may force the U.K. to recover the relief companies have gained with the exemption.

Diageo, the world’s largest distiller, said Jan. 25 that the state aid probe is likely
to affect other U.K.-based multinational companies whose tax structures are “in line”
with the disputed U.K. laws.

Imperial Brands Plc, the maker of JPS cigarettes, said two months ago in its
full-year results that it is “monitoring” the investigation. U.K. software company The Sage Group Plc
said this month its
2017 annual report, meanwhile, it doesn’t expect a final decision on the matter this year.

Like Diageo, neither company has made a provision for the state aid probe in their
accounts.

Special Treatment Forbidden

Dating to the 1980s, the U.K.’s
controlled foreign company rules aim to stop businesses from using overseas subsidiaries to cut their tax bills by
shifting profits to low-tax jurisdictions.

When the U.K. last changed its CFC rules in 2013, however, it included a U.K. tax
exemption for certain intra-group financing between two subsidiaries based outside
the country.

“Thus, a multinational active in the U.K. can provide financing to a foreign group
company via an offshore subsidiary,” the European Commission said in an
Oct. 26 statement. The exemption allows the parent company to avoid U.K. tax if the subsidiary receiving
interest payments via the financing is in a tax haven, or if the financing income
is not reallocated to the U.K., it added.

U.K.'s 2010 Corporate Roadmap

Under former Chancellor George Osborne, the U.K. officially announced its intentions
to change CFC rules in the government’s 2010
Corporate Tax Roadmap.

After
consulting on the changes during 2011, the Treasury said at the
2012 budget it would bring in the new laws in 2013, aiming to “better reflect” how modern businesses
operate.

The changes included “a finance company partial exemption that in broad terms will
result in an effective U.K. tax rate of one quarter of the main rate on profits derived
from overseas group financing arrangements,” the 2012 budget said.

“This became a very attractive structure for U.K. multinationals that were big enough,”
Heather Self, a tax partner at global accounting firm Blick Rothenberg, told Bloomberg
Tax by telephone Jan. 25. “The changes allowed businesses to adopt more robust and
simple structures than before, like using a Luxembourg company with Swiss branches,
which were more open to challenges,” she added.

New Dispute in France

In addition to the EU probe, Diageo said it faces a hit of up to 240 million euros
in a dispute with the French government on the taxation of interest payments. Debt
interest is a tax-deductible expense.

The company has also made headlines in the past 12 months with its
107 million-pound dispute over the U.K.’s diverted profits tax, nicknamed the “Google tax” when it was introduced
in 2015.

Any company that receives a diverted profits tax charge from the U.K.’s tax authority
must pay the disputed amount in question before they can attempt to recover it. Once
they pay, businesses have a 12-month review period when they can try to negotiate
with the government on the dispute.

Diageo said on Thursday it has entered a “process of collaborative working” with Her
Majesty’s Revenue and Customs, the U.K.’s tax authority. “These discussions are ongoing,”
it added.

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